Conflicting Concerns

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In a speech today at Harvard University (http://www.federalreserve.gov/newsevents/speech/bernanke20080604a.htm), Federal Reserve chairman Ben Bernanke dealt with the similarities and differences between inflation 30 years ago and today. Mr. Bernanke assured his audience that there were two principal differences between then – when inflation soared – and now – when inflation has remained moderate. Today’s energy efficiency is twice what it was then and today’s central bankers are more adept at controlling prices.

With respect to the second point the chairman said:

“…. The Federal Reserve and other central banks have learned the lessons of the 1970s. Because monetary policy works with a lag, the short-term inflationary effects of a sharp increase in oil prices can generally not be fully offset. However, since Paul Volcker's time, the Federal Reserve has been firmly committed to maintaining a low and stable rate of inflation over the longer term. And we recognize that keeping longer-term inflation expectations well anchored is essential to achieving the goal of low and stable inflation. Maintaining confidence in the Fed's commitment to price stability remains a top priority as the central bank navigates the current complex situation.”

The last sentence reminds us that, despite a weak economy, the Fed remains vigilant in its struggle against inflation.

Meanwhile, CNN Money reported today that:

“The chief executive of Toll Brothers Inc., the nation's largest luxury-home builder, said Wednesday the housing industry is in a "depression" and any recovery could be two or three years away.

“In candid remarks at the JPMorgan Basics & Industrials Conference a day after reporting a second-quarter loss, Robert Toll said he's not ready to call a bottom yet since the housing market could still get worse.

"’Can the market go down another ten or twenty percent? Sure,’ said Toll……..

“Buyers' lack of confidence that home prices will stop sliding is what's keeping them out of the market, rather than lack of access to credit, he said.”

It is ominous that the Fed remains concerned regarding inflation while a key practitioner in the housing market sees his sector of the economy moving from recession to depression. Who’s right? They both are. That’s what's scary.

© 2008 Michael B. Lehmann